Friday, April 12, 2013

Traditional wooden looms have passed down for generations by weaving families in the poor communities of Bhagalpur, Bihar. An Eco Kargha employee follows a traditional method for spinning bobbins by hand. (Image courtesy of Upaya Social Ventures)

February’s most-read post on NextBillion by Bob Webster, the chief operating officer of Grassroots Business Fund (GBF), laid out the argument for a hybrid model for impact investing. The blueprint that GBF put into action consists of a formal fund for institutional investors and a not-for-profit “side-car” to the profit engine that provides business advice to the portfolio companies. Webster believes this model has the most potential for both social and fiscal returns.

In March, Sachi Senhoy and Brian Arbogast of Upaya Ventures, presented somewhat of a counterpoint view in their piece: How to bridge the 'Pioneer Gap' and support entrepreneurs in the earliest stages. They explain that Upaya Social Ventures, a fund targeting enterprises with the potential to grow into large-scale employers of the ultra poor, was initially set up as a for-profit entity. But managers quickly realized that return-minded capital would neither extend the risk necessary to finance social enterprise startups nor would it float the advisory services required to mentor the entrepreneurs behind them. Those factors led to a restructuring, as they explain:

We knew we needed to build a “safety valve” for the traditional venture model that would allow us to quickly back nascent but promising ideas and work alongside the entrepreneur to build the company. After extensive due diligence, we came to see philanthropic funds as the ideal capital to fill this role, ready to take chances in areas where return capital feared to tread. Furthermore, housing both the investing and technical assistance functions within a nonprofit – instead of splitting them through a hybrid model – opened access to foundations and donor agencies to more easily underwrite the needed business development support. Internally we called this strategy “Pioneer Capital,” and saw it as the best fit for our partners’ needs.

These dueling visions are at the heart of impact investing, and probably the key reason why the Senhoy/Arbogast article was the most-read and most-shared article in March.

“The salesperson makes an offer: buy the cook stove today in cash and get a 10 percent discount. Or keep the stove for a month to test it out (and pay the extra 10 percent). Over 90 percent of customers opt to test the stove and pay the 10 percent premium. They are too poor to take a risk.

Salespeople leave customers a Toyola Money Box. Every other day when they buy charcoal, customers put the money they save (about 50 percent a day) in the box. In a month when the salesperson comes back the customers open the box and immediately see the savings the stove has brought them. It’s a visible way to demonstrate product benefits.”